Salary Budgets Projected to Hold Steady in 2014

By Stephen Miller, CEBS
7/11/2013

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updated July 17, 2013

U.S. base pay increases are projected to average around 3 percent across industries and positions in 2014, with increased pay differentiation for high performers, say new forecasts by WorldatWork, Mercer, Hay Group and others.

Worldwide, year-over-year salary budgets declined from 2012 to 2013 in every country surveyed except the U.S. but are projected to remain stable or increase slightly in 2014, according to the 40th annual WorldatWork 2013-2014 Salary Budget Survey report.

Preliminary findings released by WorldatWork in July 2013 include the following salary-budget percentage increases:

Global Salary-Budget Trends

Actual 2012

Actual 2013

Projected 2014

India

11.2%

10.5%

10.9%

China

9.1%

8.2%

8.5%

Brazil

7.7%

6.8%

7.2%

Singapore

4.3%

4.2%

4.3%

Australia

4.0%

3.7%

3.8%

UK

3.1%

2.9%

3.0%

Netherlands

3.1%

2.8%

2.8%

Canada

3.0%

2.9%

3.1%

France

3.0%

2.7%

2.8%

Germany

3.0%

2.9%

3.0%

United States

2.8%

2.9%

3.1%

Spain

2.8%

2.4%

2.5%

Japan

2.6%

2.4%

2.5%

Source: WorldatWork 2013-2014 Salary Budget Survey.

“The gradual increases in the U.S. is good short-term news, but falling pay budgets in every other industrialized country isn't great news for the global economy on which U.S. economic growth is so dependent,” said Kerry Chou, CCP, senior compensation practice leader for WorldatWork.

Although it may appear that organizations in India are the most generous among the countries surveyed, the 10.5 percent average wage increase for 2013 was offset by annual inflation approaching 10 percent. “This means workers in India are not better off than workers in countries where salary increases are below average but still higher than inflation,” Chou added. Workers in the U.S., for example, have more buying power because the average 2013 salary-budget increase is 2.9 percent, while the annualized inflation rate, as of April 2013, when survey data were collected, was only 1.1 percent.

Salary budgets take into account annual wage changes as well as the higher (or sometimes lower) cost of recruiting new talent. And they generally reflect what is going on in the national economy, Chou explained. “A nervous economic recovery creates nervous employers who are hesitant about making significant changes to their salary budgets and other fixed costs but are making an effort to find other ways to reward employees.”

Pay-for-Performance Trends

To motivate and retain employees while planned pay increases remain tepid, survey respondents from U.S. companies said they are focusing on:

Variable pay. Depending on employee category, 81 percent to 91 percent of eligible U.S. workers received annual bonuses or other types of variable pay in 2012. For officers/executives, 94 percent were eligible for variable pay in 2012, though only 91 percent actually received it.

Increased differentiation based on performance. In 2014 high performers can expect an average merit pay increase of 4.1 percent, while middle performers may get just a 2.7 percent raise (a difference of 152 percent).

2013 Merit Increases Awarded by Performance Category

High Performers

Middle Performers

Low Performers

Percentage of employees estimated to be rated in this category

25%

68%

6%

Estimated average merit increase

4.1%

2.7%

0.6%

Source: WorldatWork 2013-2014 Salary Budget Survey.

The survey was fielded among WorldatWork members employed in the HR, compensation and benefits departments of mostly large companies.

Other Survey Forecast Reports

Mercer Projects 2.9 Percent Increase for 2014

Preliminary findings from HR consultancy Mercer’s 2013/2014 US Compensation Planning Survey, released in July 2013, show that the average raise in U.S. base pay is expected to be 2.9 percent in 2014, modestly rising from 2.8 percent in 2013 and 2.7 percent in 2012 and 2011.

Salary increases for top-performing employees—about 7 percent of the workforce—will be higher as companies continue to focus on retaining top talent, the survey found.

Average Base Pay Increases by Performance Level(based on U.S. companies with a five-point rating scale)

Percent of Workforce

Average Pay Increase

Highest-rated

7%

4.6%

Next highest-rated

30%

3.5%

Middle-rated

54%

2.6%

Low-rated

7%

0.9%

Lowest-rated

2%

0.2%

Source: Mercer, 2013/2014 US Compensation Planning Survey.

“In an improved economy top performers continue to get salary increases nearly twice that of an average performer, which indicates that pay for performance is alive and well in the annual merit process,” said Catherine Hartmann, a principal in Mercer's rewards consulting business.

In addition to differentiating salary increases based on performance, organizations also are targeting "high-potentials" and those with critical skills for enhanced rewards, Mercer found. "Employers are clearly starting to see the value of assessing and addressing their workforce needs systematically," said Hartmann.

Mercer's survey includes responses from nearly 1,500 midsized and large emloyers across the U.S., reflecting pay practices for more than 13 million workers.

Hay Group Expects 3 Percent Increase

Similarly, research released by Hay Group in July 2013 indicates U.S. employees can expect median base salary increases of 3 percent in 2014, which is consistent with forecasted base salary increases reported for the last three years.

After factoring in annualized consumer price index growth at 1.4 percent, the resulting pay movement for 2014 will be a net gain of 1.6 percent. This compares to a 0.8 percent net gain for employees in 2013.

In the general industry group, the projected median pay increases of 3 percent were consistent across the board for executives, middle management, supervisory and clerical positions. Hay Group's research also showed that pay increases had little variation between the highest and lowest paid employees, with only a 0.5 percent difference between those employees in the 25th percentile value (2.5 percent) and 75th percentile value (3.0 percent).

The 3 percent median base salary increase holds fairly steady across most industries, including chemical, consumer products, financial services, health insurance, hospitals, industrials and utilities. One industry, however, did manage to stray from the status quo in favor of higher rewards. The data shows that employees in the oil and gas sector can expect median pay increases of 4 percent in 2014.

Hay Group’s forecast results are based on the latest data available from the consultancy's U.S. database, provided by over 400 US organizations from March through June 2013.

To keep valued employees from searching for greener pastures, “firms must address their employee engagement challenges and focus on reward programs that have the most impact on retention,” advised Jeff Blair, Hay Group’s U.S. productized services leader. “Typically, these include incentive programs and key nonfinancial rewards, such as career development opportunities, meaningful job designs, work climate and recognition programs.”

Hay Group’s Reward Next Practices research study, conducted earlier this year, confirmed this emphasis. According to the study, 56 percent of organizations are increasing future emphasis on improving their variable pay programs and 63 percent are focused on improving key nonfinancial reward programs.

Conference Board Also Sees 3 Percent Increase

By year’s end, U.S. salary budgets for 2013 will have seen a median increase of 3 percent, just like the previous year, according to a June 2013 report by The Conference Board. Projections for 2014 are also 3 percent, which is consistent with the notion that the economic recovery has not yet picked up enough strength to substantially raise salary budgets.

Geographic Differences

Changes in wage rates vary based on location. In 2012, wages for the average U.S. worker in most U.S. metropolitan areas grew but in some cities salaries continued to fall, and eight cities saw a decline of at least 1 percent in weekly wages, according to U.S. Bureau of Labor Statistics data.

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